Otter hoping investments will solve unfunded liabilities gap for state retirement system


Sen. Tom Coburn, R-Oklahoma, has released a report on wasteful government spending and Idaho projects are cited three times among the Top 100.

Gov. Butch Otter is hoping the economy will solve Idaho’s retirement funding problem.

Otter, Speaker of the House Lawerence Denney, and Senate Pro Tem Brent Hill joined forces earlier this month to pressure members of the oversight board for the Public Employment Retirement System of Idaho (PERSI) to delay a contribution rate hike for employers and employees participating in the system.

Otter is also hoping that investment returns by PERSI will make the contribution hike unnecessary and it’s possible he’s right.

The governor and legislative leaders also told PERSI board members that delaying the rate increase would help set the budget for fiscal year 2012, a budget that will be set in the 2011 legislative session.

In his letter, Otter outlined his reasoning for making the request, saying that while state law requires that PERSI to keep its fiscal base at a level less than 25 years worth of unfunded mandates, the board could save the state money while preserving the integrity of the fund.  PERSI is about 88 percent funded with a 17.5-year amortization rate, which means the amount of time it would take the state to pay off its liabilities for the program.

One important factor in urging board members to delay the contribution hike is that it will give PERSI investments more time to mature to close the unfunded liability gap.  “An equally important part of the scenario if not a more important part, is that the investments are recovering so a delay was deemed wise,” said Jon Hanian, Otter’s press secretary. Rep. Fred Wood, R-Burley, told IdahoReporter.com in November that with PERSI account at 88 percent of needed funding that the state “can invest our way out of that.”

When asked directly if the governor is looking for investments to erase the funding gap, Hanian responded with a simple, “Yes.”

Data suggests that Otter may be onto something playing the waiting game with the state’s retirement account.  In fiscal year 2011, which began July 1, the PERSI fund has earned more than $1.3 billion on its investment portfolio, erasing all losses taken in the previous two years.  The PERSI fund is valued at about $11.3 billion, though it needs around $12.2 billion to reach fully-funded status – or an additional billion dollars

But some board members don’t seem comfortable with relying only on investments to shore up retirement funding.  Kirk Sullivan was one of the members not necessarily thrilled with the decision to delay.  “I have to admit, I am very concerned about this,” Sullivan said before the vote to delay was taken at the last board meeting.  “I understand that the state is out of money, I also understand that … we have a fiduciary responsibility. Protecting the fund is our legal responsibility.”

Joy Fisher, another trustee, warned that hikes are still necessary and not optional.  “I think it’s really important people understand that this is just a postponement,” said Fisher.  “We still need to take this action.”

The one-year delay in the contribution rate – currently 10.4 percent of an employee’s salary for public employers – will also serve another purpose.  The move by the board is expected to save $15 million, which Otter said will aid the budgeting process while not affecting the overall health of PERSI accounts.

“All available information indicates that a one-year postponement would not affect the sustainability of the PERSI fund,” wrote Otter Dec 1.  “Since a one-year rate increase would assist the Executive and Legislative branches in balancing the State’s budget for fiscal year 2012, I am today formally requesting that the PERSI board take that action.”

The rate hike, originally set for July 1, 2011, will now take place one year later.  Employers pay 10.44 percent of employee pay rates into the retirement system, while employees pitch in about 4.8 percent.  When the new rate is implemented, employers will pay 11.44 percent and employees will be asked to contribute 5.3 percent.  For the average PERSI member, the higher rate will mean about $13 more per paycheck going to their retirement accounts.

The PERSI board decided in December of 2009 to phase-in an overall increase of 5.8 percent in the contribution rate over three years to build the health of the fund.  The decision delayed the entire process by one year, meaning the phase-in progression will begin July 1, 2012, and end July 1, 2014. Employers pay two-thirds of the contribution rate, while employees pay the rest.

PERSI has more than 68,000 contributing members and about 33,000 retired enrollees.  The fund takes in about $39 million in contributions from enrollees on a monthly basis and pays out about $46 million in benefits, with the difference being paid by investment returns.

In addition to saving the state $15 million in fiscal year 2012, PERSI board members estimated that local, city, and county government entities participating in the retirement system would save a combined $25 million thanks to the delay.

Note: See Otter’s letter here and the legislative leaders’ letter here.

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Butch Otter thinks investment income may prevent rate hikes in the future, Butch Otter thinks investment income may prevent rate hikes in the future
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